‘Mise-Ruble?’ Russia’s currency hits 5-year low

The ruble has taken a spectacular dive in 2014, so far this year losing about 10 percent. However, the Central Bank and government think the volatility isn’t a concern, adding that the currency is poised to fall further.

On Monday the euro reached a historical high of 47.64, with the
dollar close to 35, according to the data from the Central Bank
of Russia (CBR).

High volatility has sent the ruble against the euro-dollar basket
to lows that were last seen in February 2009.

“Since late January 2013 the ruble is off almost 16 percent
against the dollar and 17 percent against the euro,” says
Chris Weafer, senior partner at Moscow-based consulting firm,
Macro Advisoryw, wrote in e-mail to RT.

Policymakers and most analysts agree this trend will continue
into 2014, as Russia’s Central Bank has reduced regular
interventions seeking a free-floating currency by 2015.

The trend of the falling ruble is likely to continue, instead of
strengthening, according to Russia’s Economic Development
Minister Aleksey Ulyukaev talking to the Davos Economic Forum in
Switzerland. The minister cited lackluster economic growth,
investor sentiment, and the country’s balance of payments.

“There are three main reasons. Foremost – expectations of
economic growth; they’ve gone down, which means a lower
assessment of all national assets, including a national currency.
This is the basic thing,” Interfax quotes Ulyukaev as
saying.

Investor sentiment is the last but not the least factor,
according to Ulyukaev.

“Investors are fearful and … are more likely to take steps
back,” he said.

Sergey Yarkov from RIA Ratings, predicts that by the end of 2014,
the ruble could weaken another 5-10 percent, based on current
trends and rates.

‘No time to feel ‘Mise-Ruble’

This is how Ivan Tchakarov, the senior analyst for Russia and
CIS, headlined his report last week. However further ruble
dynamics are questionable.

Ulyukaev thinks a weak ruble could help the economy, as a weak
currency can help boost exports, and make domestic products more
competitive both inside and outside of Russia.

“I’m against stimulating economic growth by artificially
weakening the price of currencies,” Ulyukaev said in Davos.
“But since today’s weakening is not artificial, but a normal
weakening, a natural one based on the market demand and
supply…..why not to get a positive effect from lowering costs
which are unacceptably high, as well as higher competitiveness
for some industries? We’ll see,” the minister said.

“A weaker ruble is a boon to the struggling Russian economy
at this cyclical juncture. Given the equilibrium nature of the
ruble weakening, the softer currency is serving to facilitate
macroeconomic adjustment to a still challenging external and
domestic backdrop,” Tchakarov added.

However, citing just exporters’ gains is shortsighted, according
to Igor Nikolaev, director of the strategic analysis department
at PKF.

“A weaker ruble means less foreign investment and lower
business activity, as investors try to stay away from an economy
with a weakening currency”, Nikolaev said.

“To keep the currency out of a big slump the Russian
authorities need to stop insisting to everyone that a free
floating ruble is a blessing,” Nikolaev said.

If Russian policymakers do change their tone regarding the ruble,
the currency may fall another 1 or 2 rubles – to 38 or 39 rubles
to the dollar. Otherwise, the slump may be bigger, but definitely
not as dramatic as it was in 1998, as the economic background is
different, Nikolaev said, referring to the country’s $87.4
billion Reserve Fund.

“The real danger is that this combination of ruble weakness
contributing to slower growth can then add to ruble weakness and
you are very quickly in a downward spiral that may be hard to
pull out of. The government and the Central Bank need to quickly
find a way to reassure the market and savers that this will not
occur,” Weafer said.

But “looking purely at the economics, the worst of the slide
should nearly be over,” he concluded.

Emerging economies in investor sell-off

Investor sell-off is also a contributing factor to the weaker
ruble. Russia lost a total of $62.7 billion in capital outflow in
2013, which was far above the Bank’s $57 billion estimate.

“The downward spiral in the value of emerging market
currencies started when the Chairman of the US Federal Reserve
Bank announced in May of last year, the start of the unwinding of
the quantitative easing program would soon start,” Weafer
said.

“That news led to the specific concern that capital would
start to flow out of emerging economies and back into US dollar
assets. The presumption being that a significant amount of the
quantitative easing cash made available by the Fed since 2009 had
found its way into these economies,” he added.

However, Tchakarov said that the sell-offs are only bringing the
ruble closer to fair value.

“Using a net foreign asset approach to determining fair
value, we estimate that the ruble is now fully in line with
underlying fundamentals,” added Tchakarov.

Other central banks have intervened with a strong hand to prevent
such a fall - Turkey and Ukraine have used heavy-handed practices
to artificially prop up their currencies.

Saving dilemma

The last week has seen new historic lows for the ruble, and many
Russians are panicking about where to put their savings and
whether they are safe in rubles. The crisis of 1998 is still
fresh in many people’s minds: one day the ruble was trading 6 to
the dollar, the next day, 21. But the circumstances then were
quite different- the ruble crashed because the state said it
couldn’t meet its debt obligations. Russia now has a variety of
billion dollar rainy-day cash funds it can fall back on, in case
of a repeat crisis.

Even though the ruble has hit a 5-year low, Sberbank’s chief
German Gref said it’s still best for Russians to keep their
savings in rubles. Impulsively converting savings into dollars on
a volatile price surge could actually result in customer losses.

Nikolaev, however, remained less patriotic, saying that buying
dollars with some extra ruble savings would be the most rational
choice.